One of the most common questions I get from business owners is how they should grow their businesses.
Of course, the answer is, it depends. It depends on your business model, your competitive space, your internal resources, etc. However, let me offer some general considerations for the build route versus the buy or acquisition route of growing a company.
To give you some very general figures:
- For acquisition, you can assume 1X the annual recurring revenue from revenue sources that donât involve a third party, such as domains for example.
- With organic growth, costs vary significantly based on the type of hosting you offer, the geographic location you are selling in, and the sales and marketing strategies youâre employing, but you can often expect to pay more than 1X for organic growth.
With organic growth, you have control on where you will focus your efforts and to what degree (e.g. specific product types, geographic locations, number of leads, volume of traffic etc.) and can therefore allow you to be a lot more efficient with your resources.
Acquiring a business, on the other hand takes up a huge amount of your resources over a shorter period of time and doesnât often give you same degree of flexibility. Due diligence is crucial and you can spend tens of hours working or more on a deal, only to have it fall through at the last minute.
Apart from the basics such as choosing to buy a business based on OS or the type of hosting, you generally have very little control over other variables and you could have a very diverse customer base on your hands. The learning curve to service them could be steep and costly.
Organic growth is incremental and controlled which mitigates risks and makes it much easier to support new customers.
If due to acquisitions your customer base becomesvery heterogeneous, there may be a negative impact on an exit strategy. You may not be able to show a history of renewals. You may be juggling multiple brands offering similar services at different prices. If you only grow by acquisition, the buyer may be purchasing a decreasing asset as there is no marketing strategy in place to offset natural customer churn.
Thereâs plenty to think about when it comes to closing a dealâ¦
- How much interest is there?
- What will the deal structure be? How much will you have to pay up front?
- Do you have access to the capital you need?
- Can you move quickly enough to jump on opportunities?
Iâve worked in the hosting and technology space for over 15 years now. Iâve seen the marketing side of the business with eBridge Marketing Solutions, and Iâve seen the sales and acquisition side, with our M&A business The Host Broker. While itâs impossible to give advice that will apply to any organization, the above considerations should give you some good food for thought when it comes to choosing between a build or a buy strategy.